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Article
Publication date: 1 December 2004

R. Gandhinathan, N. Raviswaran and M. Suthakar

Globalization has provided excellent opportunities for the global manufacturing community together with a stringent barrier on cost control. Target costing has emerged as…

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3450

Abstract

Globalization has provided excellent opportunities for the global manufacturing community together with a stringent barrier on cost control. Target costing has emerged as one of the main tools in aiding the manufacturers to be globally competitive. This paper analyses the effect of tools such as quality function deployment (QFD) and value engineering (VE) on target costing and explores the way in which these tools assist in achieving the target cost. The target costing model developed by Cooper and Slagmulder (Cooper, R. and Slagmulder, R., Target Costing and Value Engineering, Productivity Press, New York, NY, 1997) has been modified and tools such as QFD and VE have been incorporated in the model. Due to inherent uncertainties in the associated cost of various elements, the model has been further strengthened with the use of fuzzy logic. The theoretical model developed was implemented in an Indian auto component manufacturing company and the results were analysed. Target costing significantly relies upon QFD and VE for its effective implementation. Uncertainty in cost estimation plays a significant role in the target costing process since any variation in cost violates the cardinal rule of target costing, “the target cost should never be exceeded”. Fuzzy logic plays a vital role in accounting for uncertainty in the target costing process and gives a different perspective to arrive at the function cost. A functional approach (VE) combined with QFD backed by fuzzy approach appears to work effectively for a target costing process that is evidenced from the case study. It appears that the model developed will work satisfactorily for an industrial product and the validity of the model for fast moving consumer goods has to be ascertained.

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International Journal of Quality & Reliability Management, vol. 21 no. 9
Type: Research Article
ISSN: 0265-671X

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Book part
Publication date: 26 June 2013

Robert Kee and Michele Matherly

This paper examines how target costing decisions can be impacted by product and production interdependencies.

Abstract

Purpose

This paper examines how target costing decisions can be impacted by product and production interdependencies.

Design/methodology/approach

Numerical examples are used to investigate the effect that product and production interdependencies have on target costing decisions. Mixed integer programming and simulation are used to model the interrelationships between a product’s cost reduction effort and related decisions such as product mix, pricing, and capacity acquisition. Product and production interdependencies are introduced by evaluating a product with multiple price and demand options, capacity is acquired in large discrete quantities, and resources have economies of scale. Analyses of choices made with and without considering product and production interdependencies are used to evaluate their effects on target costing decisions.

Findings

A product’s cost reduction effort cannot be determined independently of other production-related choices, such as product mix, capacity, and price, in the presence of product and production interdependencies.

Research implications

The findings of this paper underscore the need for additional research to understand the conditions that impair target costing decisions and the economic consequences of suboptimal decisions.

Practical implications

Rather than assessing target costing decisions at the individual product level, these decisions must be evaluated at the portfolio level of the firm’s operations.

Social implications

Suboptimal target costing decisions impact the products and product mix that the firm chooses to offer, which affects the ability of organizations to effectively achieve their strategic goals.

Originality/value

This paper identifies new limitations to target costing that can help managers understand the technique better and lead to improved target costing decisions.

Details

Advances in Management Accounting
Type: Book
ISBN: 978-1-78190-842-6

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Book part
Publication date: 29 March 2016

Marc Wouters, Susana Morales, Sven Grollmuss and Michael Scheer

The paper provides an overview of research published in the innovation and operations management (IOM) literature on 15 methods for cost management in new product…

Abstract

Purpose

The paper provides an overview of research published in the innovation and operations management (IOM) literature on 15 methods for cost management in new product development, and it provides a comparison to an earlier review of the management accounting (MA) literature (Wouters & Morales, 2014).

Methodology/approach

This structured literature search covers papers published in 23 journals in IOM in the period 1990–2014.

Findings

The search yielded a sample of 208 unique papers with 275 results (one paper could refer to multiple cost management methods). The top 3 methods are modular design, component commonality, and product platforms, with 115 results (42%) together. In the MA literature, these three methods accounted for 29%, but target costing was the most researched cost management method by far (26%). Simulation is the most frequently used research method in the IOM literature, whereas this was averagely used in the MA literature; qualitative studies were the most frequently used research method in the MA literature, whereas this was averagely used in the IOM literature. We found a lot of papers presenting practical approaches or decision models as a further development of a particular cost management method, which is a clear difference from the MA literature.

Research limitations/implications

This review focused on the same cost management methods, and future research could also consider other cost management methods which are likely to be more important in the IOM literature compared to the MA literature. Future research could also investigate innovative cost management practices in more detail through longitudinal case studies.

Originality/value

This review of research on methods for cost management published outside the MA literature provides an overview for MA researchers. It highlights key differences between both literatures in their research of the same cost management methods.

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Abstract

Details

Servitization Strategy and Managerial Control
Type: Book
ISBN: 978-1-78714-845-1

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Book part
Publication date: 14 July 2006

Robert Kee and Michele Matherly

For firms using target costing, separating decision management from decision control helps to minimize the agency costs incurred throughout a product's economic life…

Abstract

For firms using target costing, separating decision management from decision control helps to minimize the agency costs incurred throughout a product's economic life. Prior literature focuses on decision-management issues related to target costing, such as new product development (i.e., initiation) and production (i.e., implementation). In contrast, this article highlights the decision control aspects of target costing, which consist of ratifying product proposals and monitoring the product's implementation. While products initiated with target costing are chosen because they meet their allowable cost, product ratification requires assessing how well products contribute toward strategic goals, such as improving the firm's market value. To facilitate the ratification decision, this article develops an equation for determining a product's net present value (NPV) based on the same accounting data used during the initiation process. The article also describes monitoring a product's implementation through periodic comparisons to flexible budgets and a post-audit review at the end of the product's economic life.

Details

Advances in Management Accounting
Type: Book
ISBN: 978-1-84950-447-8

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Book part
Publication date: 23 September 2014

Marc Wouters and Susana Morales

To provide an overview of research published in the management accounting literature on methods for cost management in new product development, such as a target costing

Abstract

Purpose

To provide an overview of research published in the management accounting literature on methods for cost management in new product development, such as a target costing, life cycle costing, component commonality, and modular design.

Methodology/approach

The structured literature search covered papers about 15 different cost management methods published in 40 journals in the period 1990–2013.

Findings

The search yielded a sample of 113 different papers. Many contained information about more than one method, and this yielded 149 references to specific methods. The number of references varied strongly per cost management method and per journal. Target costing has received by far the most attention in the publications in our sample; modular design, component commonality, and life cycle costing were ranked second and joint third. Most references were published in Management Science; Management Accounting Research; and Accounting, Organizations and Society. The results were strongly influenced by Management Science and Decision Science, because cost management methods with an engineering background were published above average in these two journals (design for manufacturing, component commonality, modular design, and product platforms) while other topics were published below average in these two journals.

Research Limitations/Implications

The scope of this review is accounting research. Future work could review the research on cost management methods in new product development published outside accounting.

Originality/value

The paper centers on methods for cost management, which complements reviews that focused on theoretical constructs of management accounting information and its use.

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Article
Publication date: 1 March 2005

Marilyn M. Helms, Lawrence P. Ettkin, Joe T. Baxter and Matthew W. Gordon

The target costing method works “backward” from traditional cost‐plus methods and begins with a targeted sales price for a product. This price is set based on what the…

Abstract

The target costing method works “backward” from traditional cost‐plus methods and begins with a targeted sales price for a product. This price is set based on what the customer is willing to pay. It considers not only the preferred current selling price but also the later life cycle pattern of prices. This technique has key managerial implications. This article considers these implications along with implementation guidelines. Examples of industries successfully using target costing are included. Ongoing controversies concerning where the techniques can best be used are discussed. Further considered are international differences in target costing as well as challenges of global outsourcing along the supply chain. The article ends with implementation challenges, significance for practice, and suggestions for future research.

Details

Competitiveness Review: An International Business Journal, vol. 15 no. 1
Type: Research Article
ISSN: 1059-5422

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Article
Publication date: 1 September 2006

Patricia Everaert, Stijn Loosveld, Tom Van Acker, Marijke Schollier and Gerrit Sarens

Despite appearing in the literature over 10 years ago as a potentially exciting cost management technique, there is still limited agreement about the nature of target

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5629

Abstract

Purpose

Despite appearing in the literature over 10 years ago as a potentially exciting cost management technique, there is still limited agreement about the nature of target costing. The purpose of this study is to explore the characteristics of target costing, and to test whether these characteristics were adopted in three European companies that used target costing.

Design/methodology/approach

This paper draws on case study data, collected at three manufacturing companies (consumer electronics, machinery, and transportation equipment).

Findings

The paper identifies eight characteristics of target costing, based on the early Japanese case descriptions. These characteristics are related to the way a target is set and how progress towards that target is measured. The findings of the case studies confirm these characteristics. However, some differences were found regarding the interpretation of the strict rule that “the target cost cannot be exceeded at product launch”.

Research limitations/implications

The results indicate that future research on the adoption of target costing cannot be disconnected from its characteristics. Further studies might investigate whether degree of openness to suppliers, leadership position, time pressure and position in the supply chain can explain the noted differences in characteristics among companies.

Practical implications

The characteristics identified in this paper provide an aid to researchers and managers considering target costing. Detailed case descriptions provide best practices examples for other companies.

Originality/value

This study is the first empirical paper concerned with describing the typical characteristics of target costing. By exploring the characteristics, we hope to inspire others to further explore this interesting phenomenon.

Details

Qualitative Research in Accounting & Management, vol. 3 no. 3
Type: Research Article
ISSN: 1176-6093

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Article
Publication date: 6 February 2007

Caleb J. Rattray, Beverley R. Lord and Yvonne P. Shanahan

As there is scant research outside Japan on the implementation of target costing, the purpose of this research is to examine target costing practices in New Zealand.

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3291

Abstract

Purpose

As there is scant research outside Japan on the implementation of target costing, the purpose of this research is to examine target costing practices in New Zealand.

Design/methodology/approach

A mail questionnaire survey was sent to 80 New Zealand manufacturers, with a response rate of 31 (39 per cent).

Findings

A total of 12 of the 31 respondents use target costing. Findings on the use of target costing that contrast with or add to prior studies include the following: target costing is being applied to existing products; the manufacturing department is highly involved in target costing; the involvement of suppliers in target costing is relatively low; considerable adjustments are made to the calculated allowable costs, especially in order to assist sales of future products and to ensure the achievement of target costs; and higher achievement of target costs is associated with higher firm performance. The goals of target costing and the departments involved in the practice were similar to those in prior studies.

Research limitations/implications

The sample size and minimal number of firms actually using target costing has made it difficult to obtain statistically significant results. The survey method prevents follow‐up questions and clarification of ambiguities. Single measures of performance and strategy were used.

Originality/value

This survey provides academic researchers and teachers and firms implementing or using target costing systems with a greater understanding of how target costing is being used by New Zealand manufacturers, as well as adding to the scant research on target costing outside Japan.

Details

Pacific Accounting Review, vol. 19 no. 1
Type: Research Article
ISSN: 0114-0582

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Article
Publication date: 1 July 2000

Archie Lockamy and Wilbur I. Smith

This article examines the use of target costing as a means to improve the management of supply chains. A discussion of the shortcomings of traditional and activity‐based…

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10027

Abstract

This article examines the use of target costing as a means to improve the management of supply chains. A discussion of the shortcomings of traditional and activity‐based cost management approaches to supply chain management provides the basis for exploring the use of target costing within supply chains. Customer requirements and supply chain relationships are identified as key criteria for selecting the most appropriate method of target costing for supply chains. Price‐based, value‐based, and activity‐based cost management approaches to target costing are discussed, and recommendations for their use based upon customer requirements and supply chain relationships are offered. Conclusions are provided on the use of target costing to enhance a supply chain’s ability to improve customer satisfaction.

Details

Industrial Management & Data Systems, vol. 100 no. 5
Type: Research Article
ISSN: 0263-5577

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